Vice President, Government Relations
June 11, 2007
Department of Defense
c/o Federal Docket Management System Office
1160 Defense Pentagon
Washington, D.C. 20301-1160
Re: Proposed Rule on Limitations on Terms of Consumer Credit Extended to Service
Members and Dependents, 32 CFR Part 232
H&R Block, Inc. (“H&R Block”), on behalf of itself and with respect to its franchisees,
appreciates the opportunity to comment on the implementation of the John Warner National
Defense Authorization Act for Fiscal Year 2007, Pub. L. 109-364, Section 670, “Limitations
on Terms of Consumer Credit Extended to Service Members and Dependents” (the “Act”).
The Act caps interest rates and requires disclosures for certain consumer credit products
offered to military personnel and their dependents, including a military annual percentage
interest rate (“MAPR”), which is calculated by including certain loan fees as well as finance
charges, and which supplements disclosures required by the Truth in Lending Act (15 USC
1601 et seq.) (“TILA”) and its implementing Regulation Z, codified at 12 CFR Part 226. The
Department of Defense (the "Department") has requested comments in connection with its
proposed regulations to carry out the Act, published at 72 Federal Register 18157(Number
69) on April 11, 2007 (“Proposed Rule”).
The Department’s activities to educate military personnel financially and to protect them
against exploitation are laudable. All Americans want service members to be well equipped
for financial life as well as military service and to be able to have access to healthy financial
choices that meet their needs. Improving their welfare, morale and force readiness are
important objectives contributing to national security that we respect.
Because our interest is confined to refund anticipation loans (“RALs”), we have only
answered questions relevant to the RAL product. Also, our role is that of the agent of a
lending bank for purposes of offering RALs, not that of a creditor. Our comments should be
viewed in that context.
Before we address the specific questions raised, we would like to provide you with some
background information regarding H&R Block and to discuss three key points:
1. RALs are not appropriately included among the financial products defined as
“predatory” and, as a result, should be excluded from the definition of “consumer
credit” in the Proposed Rule.
2. In the event RALs are not excluded from the Proposed Rule, the refund account
fee should not be included in the definition of MAPR. As discussed in greater
detail below, including the refund account fee in the MAPR has certain
3. Having RALs subject to the Proposed Rule creates a number of operational
difficulties including: properly identifying “Covered Borrowers” and their
dependents, having a definition of “dependent” that differs from the definition
used in the Internal Revenue Code, properly implementing required disclosures
and having sufficient time to implement the final regulations.
We also would like to discuss the extensive, existing regulations already applicable to RALs.
Background: H&R Block and RALs
H&R Block was founded in 1955 as a tax preparation firm headquartered in Kansas City,
Missouri. Today its activities have broadened to cover many financial services, including
mortgages, investment and savings vehicles, and banking products and services. Its U.S. tax
preparation services are performed at over 12,500 locations in the U.S. and abroad
(approximately 8,200 company-owned offices and 4,300 franchise offices), including some
locations on or near military facilities.
The filing of electronic tax returns is restricted under IRS rules to Electronic Return
Originators (‘EROs”), whose qualification and activities are regulated.1 Because IRS rules
prohibit an ERO who is also a tax return preparer from loaning funds secured by a tax
refund, the involvement of financial institutions is necessary.2
In the mid-1980s, H&R Block pioneered the testing and development of electronic filing of
tax returns and direct deposit of refunds with the IRS. As part of e-file development, the IRS
enabled banks to make loans secured by tax refunds which were then repaid (after deduction
of fees, including those for tax preparation) by deposit of the tax refund to a dedicated
account held by the lending bank. Only e-filed tax returns qualified.
By adopting rules regarding RALs, the IRS recognized the need certain taxpayers had for
receipt of funds faster than IRS refund delivery by mail or by direct deposit to an existing
bank account. It also responded to the challenges facing the IRS in launching e-filing. E-
filing initially cost taxpayers an added fee but the IRS still was unable to deliver refunds
sufficiently quickly to meet the needs of many taxpayers—especially those who did not have
a bank account. For a small added fee, RALs delivered significant value to taxpayers and
helped jump start the e-file program. Today, about 8.5 - 9 million RALs are made, 6% of all
individual returns filed and 11% of all e-filed returns. RALs offered through H&R Block and
its franchisees represent about 45% of the RALs made nationally.
About one in five H&R Block clients receives a RAL, suggesting that they meet the needs of
some clients but are not appropriate for all.
The IRS extensively regulates EROs and RALs through Revenue Procedure 2005-60 and IRS Publications 1345, 3112, 1345A,
1346, and 1436.
See IRS Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns (Rev.11-04), p. 44, at
1. RALs are not appropriately included among the financial products defined
as “predatory” and should be excluded from the definition of “consumer
credit” in the Proposed Rule.
1(a). RAL Benefits and Costs
The Act is aimed at abusive financial products like payday loans that average 7 to 14 times
the cost of the average RAL offered at H&R Block and permit debt-deepening rollovers that
are not allowed for RALs.3 Accordingly, we believe RALs should be excluded from the
In evaluating RAL costs, it is also important to understand the benefits. Traditional RALs
are normally an 11-day loan.4 For taxpayers who have a bank account and can accept IRS
direct deposit, that is the time saved. But nearly half of RAL borrowers are “unbanked.” For
them, the RAL may save 3-8 weeks over an IRS mailed refund check, depending upon
whether they file electronically or on paper.5 Avoiding refund delivery delays may help
consumers avoid late fees or penalties in connection with overdue bills that often spike
during and immediately after the winter holiday season. Other seasonal expenses—home
heating, car repairs and medical costs, for example, also contribute to winter financial stress.
Some service members may use RALs to ensure that they can get money timely, prior to
deployment, to wrap up personal business and leave money with their families. In these
cases, the RAL is seen as a financial solution, not a problem.
Moreover, RALs are secured loans. While they are often criticized as “high-cost,” they are
often less costly than unsecured credit, if unsecured credit is even available. When our
clients choose a RAL in connection with the H&R Block Emerald Prepaid MasterCard®
(“Emerald Card”), the total client savings can average $624 annually, far exceeding the cost
of the average RAL:
• Clients avoid costly check cashing fees at tax time. Clients save on average $84 (based
on a $2,800 RAL multiplied by the industry average check cashing fee of 3%).
• Clients can direct deposit their payroll on the Emerald Card to avoid future check
cashing. Clients save on average $540 annually (based on an $18,000 annual salary
and using check cashing services with fees of 3%). Additionally, by enabling direct
The Government Accountability Office reported that the Federal Reserve Bank of Philadelphia found fees for a payday loan range
from $15 to $30 on each $100 advanced. This translates into 7 - 14 times more costly than the average RAL at H&R Block delivered
on the Emerald Card. GAO, DOD’s Tools for Curbing the Use and Effects of Predatory Lending Not Fully Utilized, GAO-05-349
(April 2005), fn. 6, p. 6, at www.gao.gov/cgi-bin/getrpt?GAO-05-349. The same GAO report said, “The extent to which active duty
service members use consumer loans considered to be predatory and the effects of that borrowing are unknown….. DOD is unable to
quantify the extent to which the loans have associated predatory practices, the frequency of such borrowing, the amounts borrowed, or
the effects of the loans.”
See Treasury Inspector General for Tax Administration, Individual Income Tax Return Transactions Were Timely and Accurately
Recorded to Taxpayer Accounts, 2004-40-035 (January 2004), p. 6 at http://www.treas.gov/tigta/2004reports/200440035fr.pdf., and
the IRS e-file 2006 Refund Cycle Chart, Publication 2043 (October 2006) at www.irs.gov/pub/irs-pdf/p2043.pdf. In fact, the average
time advantage is 11 days but this is only for e-filed returns with direct deposit; more than two-thirds of e-filers who use direct deposit
must wait more than 10 days for access to their funds, and nearly half of the H&R Block clients who choose a RAL do not have a
bank account and so would have to wait at least 3-4 weeks for a mailed IRS check if they e-file their return. Only citing a 10 day
advantage does not accurately represent the value of a RAL and the reason many taxpayers use it. More than 85% of H&R Block
RAL borrowers would not get their IRS refund in 10 or fewer days.
The Background section of the Department’s Proposed Rule published in the Federal Register indicates that RALs “provide a
limited time advantage (approximately 10 day reduction in the time required to receive a tax return [sic]) in comparison to the cost
involved ($39-$100).” At p. 118160.
deposit, taxpayers who can wait 8 - 15 days to receive their refunds can avoid future
H&R Block, which serves 3 million unbanked taxpayers, opened 2 million Emerald Card-
based bank accounts in 2007, the first year the card was offered.6 This suggests that RALs
can also be a gateway to healthier financial choices.
As offered at H&R Block in 2007, RALs delivered on an Emerald Card, which opens a bank
account, are priced at 36% APR with an added fee of $29.95 paid to the bank to set up a
refund account. The average RAL is ~$2,800 and costs borrowers $60.00-- ($30.05 for the
finance charge and $29.95 for a refund account fee).
At H&R Block, the average finance charge is 1.07% of the amount of the refund for RALs
delivered on the Emerald Card and, with the refund account fee, is 2.14% of the amount of
the refund. An average RAL delivered by check, in contrast, has a 70% APR and is 2.07% of
the amount of the refund, and with the refund account fee, is 3.14% of the amount of the
Additionally, unlike “payday loans,” RALs cannot be rolled over and therefore do not create
or exacerbate a cycle of debt.
1(b). Cost Comparisons. A $2,800 RAL at H&R Block costs $60 and compares favorably
to alternative credit transactions: a $2,800 credit card cash advance would cost $112; three
credit card late fees for $2,800 in arrears would cost $117; three bounced checks, with bank
and merchant fees, would cost $165. Some of these alternatives have the added penalty of
impairing a consumer’s credit rating.7
As compared to other short-term credit alternatives, these RALs are about:
• one-seventh to one-fourteenth the cost of a payday loan,
• one-fifth the cost of a bank’s traditional overdraft protection,
• one-third the cost of a bounced check, and
• one-half the cost of a credit card cash advance.
RALs are not “high cost” in relation to many financial products, especially unsecured loans (if
they are available). Indeed, the Background of the Proposed Rule references less costly low
denomination loans at banks and credit unions located on military installations8 but our
understanding is that an existing bank account is required and there is an application fee.
Nearly half of H&R Block’s RAL customers do not have checking accounts, most do not
See “H&R Block Announces Plan to Open 1 Million Bank Accounts for Free And Significantly Cut the Cost of Refund Lending,”
(Sept. 7, 2006) at http://www.hrblock.com/presscenter/pressreleases/pressRelease.jsp?PRESS_RELEASE_ID=1459, and “H&R Block
Bank Opens 2 Million Accounts, Doubling the Company’s Goal, 40 Percent of Clients Previously Unbanked,” May 15, 2007), at
“Maxing out your credit card and failing to pay the bill on time are the two leading ways to lower your credit score. The lower your
credit score, the more you have to pay for credit in the future.” Michelle Singletary, “Hitting the Books on Personal Finance,”
Washington Post, Aug. 25, 2005 at D2. A recent study found that improving credit scores by only 30-points on a 300-850-point scale
translated into saving an average of $76 annually on credit card finance charges. “The best way to raise a credit score is to pay bills
regularly and on time….” Christopher Conkey, “Improved Credit Scores Could Save Billions,” Wall St. J., Sept. 21, 2005, at D2,
At p. 18160.
qualify for a conventional bank loan and many do not have credit cards. This suggests why
some service members may find a possibly higher cost product is more convenient for once-a-
year use in connection with filing a tax return.
Consumers weigh benefits against costs in making their choices. Federal law, IRS rules and
industry best practices all provide for disclosures to ensure that consumers can make
1(c). Discussion of RAL in DoD Report and Proposed Rule
The main focus of the Department report on which the legislation is based is payday lending,
not RALs. RALs are mentioned only briefly. The report indicates that, “The forms of lending
included in this report were selected through feedback from military financial counselors and
legal assistance attorneys.” Also cited was a 2006 report of the National Consumer Law
Center.9 Four consumer advocacy organizations were consulted but, while some Treasury,
FDIC and Federal Reserve Board staff were also consulted, there is no indication that the
principal regulators of the banks who make the loans or any banks or tax preparers who
make or offer RALs were given the opportunity for comment. We are not aware that the
Office of Comptroller of the Currency has ever judged RALs to be predatory although they,
and other regulators, have taken action against payday loans. Thus, RAL lenders and
facilitators may feel it is a case of mistaken identity when RALs are included among a list of
“predatory” loans in a report aimed at the genuine abuses associated with payday lending.
They may also be concerned about a lack of due process and fairness where judgments are
made without opportunity for response.
High fees and interest rates are the sole features the Department identifies to assert that
RALs are “predatory.” Yet RAL prices are dramatically lower than those of payday loans and
other products described.
The sole reason RALs seem to have been included is cost. As indicated, RALs are much less
expensive than many other credit products and, while they may be more expensive than
some loans, because many RAL customers lack a bank account or a credit card, access to less
expensive alternatives can be problematic.
The Proposed Rule identifies high costs and fees as the only reason to assert that RALs are
“predatory,” while conceding that the term “predatory” has no precise definition.10 In 2007,
Department of Defense, Report On Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents,
August 9, 2006, pp. 2, 20 (fn. 30).
Other agencies define predatory loans in ways that seem to exclude RALs. The Federal Deposit Insurance Corporation (FDIC)
provides the following answer to the question, "What Is Predatory Lending -- and What Will Your Federal Banking Agency Do About
It?" In FIL-6-2007 (Jan. 22, 2007) and the linked Supervisory Policy on Predatory Lending, FDIC distinguishes predatory lending
from subprime lending. FDIC acknowledges that, "There is no simple checklist for determining whether a particular loan or loan
program is predatory. Loan terms that are helpful to one borrower may be harmful to others." Reiterating guidance in FIL-9-2001 (Jan.
31, 2001), the Expanded Examination Guidance for Subprime Lending Programs, FDIC advises that "predatory lending involves at
least one, and perhaps all three, of the following elements:
1. Making unaffordable loans based on the assets of the borrower rather than on the borrower's ability to repay an obligation;
2. Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced
("loan flipping"); or
3. Engaging in fraud or deception to conceal the true nature of the loan obligation, or ancillary products, from an
unsuspecting or unsophisticated borrower."
fees for an average RAL of $2,800 at H&R Block were cut by 40% to less than half of what
most competitors charged for the average refund loan.
Fees for many RALs have been significantly reduced in recent years, a development that has
not been well reported or recognized. While H&R Block’s competitors generally charge more,
the administrative fee has been gradually eliminated for well over half of the industry during
2004-7. Additionally, some of the other tax preparation firms that have charged application
fees in connection with RALs have eliminated this fee. RAL industry bank fees have
remained roughly comparable at about 2% to 4% of the refund amount with the exception of
lower fees for some RALs made at H&R Block and some RALs originated by JPMorgan
The principal concern about RALs seems to be the cost when measured by an Annual
Percentage Rate (“APR”). Critics who cite high APRs often arrive at these numbers by
inappropriately including costs beyond the finance charge, sometimes including tax
preparation fees. But the Truth in Lending Act provides specific guidance as to which fees
must be included in the finance charge when calculating the APR. 11
Some experts note that most consumers seeking short-term credit in relatively small
amounts focus on the absolute amount of money they pay, which may be small, rather than
on the APR. In any case, the Truth in Lending Act requires full disclosure of loan fees as well
as APRs and both metrics are provided to consumers to use when making an informed
As noted earlier, the cost of a $2,800 RAL at H&R Block delivered on an Emerald Card is
$60.00 with all fees paid to the bank. The loan would have a 36% APR.12
It should be clear from the foregoing discussion that RALs are not appropriately included
among a list of predatory loans. While “predatory” loans are difficult to define, RALs do not
fit the features identified by the Department. Because RALs are secured by a tax refund,
they address the ability of nearly all borrowers to repay. Because the payment schedule
matches the time of the IRS direct deposit, it is realistic and reasonable. And because RALs
are a once-a-year transaction and cannot be rolled over, they do not create or exacerbate a
cycle of debt—indeed, some RALs are used to pay off higher-cost payday loans to avoid a
cycle of debt.13 In each of these respects, RALs differ substantially from the characteristics
identified for “predatory” loans.
The FDIC said it would take vigorous enforcement action against Predatory Lending as an unsafe and unsound practice and to the
extent it involves violations of law and regulation. Predatory Lending may adversely impact a bank’s Community Reinvestment Act
Rating. http://www.fdic.gov/news/news/financial/2007/fil07006a.html RALs do not meet the definition.
Federal Reserve Board Official Staff Commentary on Regulation Z, section 226.4(a)(1)(iii).
Two important points about the interest rate: First, the annual percentage rate (APR) is computed on the finance charge portion of
the RAL fee, not the refund account fee. Some consumer advocates contend that the refund account fee should be included in the APR
calculation, but this would be in clear violation of the Truth in Lending Act (15 U.S.C. §1601 et seq.) and the Federal Reserve Board’s
Regulation Z (12 CFR part 226.17(c), Comment 17(c)(1)), which sets forth special rules on how the APR for RALs should be
calculated. Refund account fees are also charged for non-loan bank products and are not exclusively an element of the loan. Second,
while interest rates must be stated in annual terms, a consumer would have to use 33 RALs to actually pay a full annual fee because
the loan is liquidated – typically in about 12 days, not a full year – when the IRS refund is deposited in the bank account. Even if the
IRS fails to pay the refund, the APR does not persist. Santa Barbara Bank & Trust, the second largest RAL lender, does not charge
more than the initial, one-time RAL fee, while HSBC Bank USA, N.A., the largest RAL lender, has shifted to a rate of 18% APR.
Thus, the stated annual interest rates sometimes described by critics as “astronomical” are in fact never paid.
2. If RALs are not excluded from the Proposed Rule, the refund account fee
should not be included in the MAPR.
In the event RALs are not excluded from the Proposed Rule, only appropriate fees should be
included in the computation of the MAPR, and price caps should not be below product costs if
the intention is to regulate, rather than effectively ban, RALs for service members and their
dependents. We believe most RAL lenders will be unable to make loans profitably if the
MAPR includes fees excluded from the APR required under the TILA. The lending bank
charges a refund account fee to open a temporary account into which the tax refund is
deposited. For TILA purposes, this fee is not included in the APR since this fee is the same
on a cash-equivalent transaction (i.e., a Refund Anticipation Check or electronic refund
transfer (“RAC”), which is not a loan and consists of the IRS depositing the tax refund into a
bank account from which the proceeds are distributed to the taxpayer after the refund
account fee and tax preparation fees are deducted).
Regulation Z (12 CFR 226) should serve as a model for calculating what fees should be
included in the MAPR, drawing on a well developed area of law. We support the proposed
exclusion of tax preparation fees, which are independent of any bank product fees, charged in
the same amount whether or not the tax client obtains a RAL, and are not a cost of credit.
We recommend exclusion of the refund account fee, which is imposed on a cash-equivalent
basis for both RALs and non-credit bank products, such as a RAC.
2(b). A 36% MAPR encourages a significant number of service members and their
dependents to obtain RALs.
Assuming that a lending bank would be able to issue RALs at a 36% MAPR, the proposal has
the effect of encouraging many service members and their dependents to take a RAL over a
non-loan product (commonly known as a Refund Anticipation Check or RAC). In effect, we
estimate at least 40% of all bank product clients in the industry would pay less for a RAL
than a non-loan RAC product. This pricing anomaly is due to the fact that the total cost of a
36% MAPR RAL is less compared to the total cost of refund account fee for a RAC for clients
that have tax refunds less than $2,800.
As an example, a client that has a $1,000 refund and receives a 36% MAPR RAL for the same
amount would pay $10.73 in total fees. In comparison, that same client’s $1,000 refund via
the RAC would cost $29.95 at H&R Block (and slightly more at other tax preparation firms).
The client would save $19.22, or 64%, by taking the RAL instead of the RAC.
In addition, clients that choose a RAL over a RAC due to the aforementioned financial
incentive would also receive their funds in 1-2 days for a RAL compared to 8-15 days for a
RAC. This would likely drive many more service members and their dependents to RALs.
Additionally, many of H&R Block’s competitors charge higher fees for RACs or similar
Payday lenders’ annual reports suggest seasonality to their business with a dip in demand during the early tax season as customers
receive tax refunds or less costly loans based on them.
products which would increase the overall number of RALs that would be less expensive than
3. Having RALs subject to the Proposed Rule creates a number of operational
There are a number of operational difficulties if RALs are subject to the Proposed Rule.
As noted below under Questions 6 and 7, the Act and Proposed Rule would define
“dependent” as the member’s spouse, the member’s child or “an individual for whom the
member provided more than one-half of the individual’s support for 180 days immediately
preceding an extension of consumer credit”. For income tax purposes, the Internal Revenue
Code requires that support be considered for the prior calendar year. As a result, there will
be confusion as to when an individual qualifies as a “dependent” for purposes of the Act and
the Proposed Rule as compared to meeting this definition for income tax purposes. The
preferred approach would be to have this definition meet the same standard as applied in the
Internal Revenue Code and related regulations.
In addition to the above, see the below responses under Question 8 (oral disclosures),
Question 9 (consumer confusion regarding multiple APR disclosures) and Question 18
(compliance by October 1, 2007).
Extensive Existing RAL Regulation by Federal Laws and IRS Rules
RALs are regulated by 10 Federal laws and IRS rules, and the practices, rates and fees of
RAL lenders are supervised by Federal bank regulators.14 While the IRS is not involved in
the credit application process or a party to any loan, the IRS specifically regulates RALs.
RAL regulation includes the following:
Fees and interest rates charged by refund anticipation lenders are regulated under the
National Bank Act, the Home Owners' Loan Act, or by authorities in a financial institution's
home state, which permits interest rates to be exported to other states.
TILA and the Federal Reserve Board’s Regulation Z require full and uniform disclosure of
annual percentage rates and finance charges and regulate calculations of annual interest
rates, and advertising of credit terms. Inconsistent state laws are preempted. The stated
purpose of Reg Z is “to promote the informed use of consumer credit by requiring disclosures
about its terms and cost.”15
The IRS extensively regulates RALs through Revenue Procedure 2005-60 and five IRS
publications, including Publications 1345 and 3112.
All aspects of the RAL process must be compliant with applicable Federal laws and regulations, including the Truth in Lending Act
and Regulation Z, Equal Credit Opportunity Act and Regulation B, Fair Credit Reporting Act, Federal Trade Commission Act, Fair
Debt Collection Practices Act, Electronic Funds Transfer Act, Gramm-Leach-Bliley Act, National Bank Act (for national banks), USA
Patriot Act, and Internal Revenue Code. To facilitate RALs, tax return preparers must apply to the IRS and be approved as Electronic
Return Originators (“EROs”). The IRS subjects ERO applicants to a suitability test that may include fingerprinting and an FBI
criminal background check, a credit history check, a tax compliance check to ensure that all required returns are filed and paid, and a
check for prior non- compliance with IRS e-file requirements. Once approved, an ERO’s identification number is included on all
returns he e-files. The IRS extensively regulates EROs and RALs through Revenue Procedure 2005-60 and IRS Publications 1345,
3112, 1345A, 1346, and 1436.
The Truth in Lending Act (15 U.S.C. §1601 et seq.) and the Federal Reserve Board’s Regulation Z (12 CFR part 226).
A tax return preparer who is an electronic return originator (ERO) cannot also be a lender.
In addition, most EROs must undergo an FBI criminal background check, fingerprinting,
verification that they have filed their individual and business tax returns and paid balances
due, and a history check of any prior noncompliance with IRS e-filing programs. Violators are
subject to suspension from the e-filing program by the IRS. Advertising is regulated,
deceptive practices are prohibited, and RAL facilitation fees are regulated. All tax preparers
are subject to laws covering fraud, misrepresentation, diligence, etc., and they can be
enjoined from misconduct. Tax preparers who represent taxpayers before the IRS under
Circular 230 are subject to suspension and additional rules.16
Specifically, for example, IRS rules regulate RALs in the following respects —
Tax preparers must “advise taxpayers that RALs are interest bearing loans and not a
quicker way of receiving their refunds from the IRS” and “ensure that taxpayers
understand that by agreeing to a RAL … they will not receive their refund from the
IRS as the IRS will send their refund to the financial institution.”
Tax preparers must “advise taxpayers that if a Direct Deposit is not received within
the expected time frame for whatever reason, the taxpayer may be liable to the
lender for additional interest and other fees, as applicable for the RAL… .”
Tax preparers must “advise taxpayers of all fees and known deductions to be paid
from their refund and the remaining amount the taxpayer will actually receive.”
Fees charged by EROs are regulated: they must be the same for all customers and
not be related to the refund amount or RAL or any figure from the tax return;
separate fees may not be charged for direct deposits.
Advertising, marketing and promotion are regulated: the use of any form of public
communication that contains false, fraudulent, misleading, deceptive, unduly
influencing, coercive or unfair statements or claims is prohibited. Tax planning
would include advice for clients who want to reduce their withholdings so they can
receive more money in each of their paychecks on a year-round basis rather than
waiting to receive a larger refund.
Tax preparers who are e-filers must undergo annual suitability checks.
Tax preparers that violate these provisions can be sanctioned for three levels of
infraction including suspension or expulsion from the e-filing program—approval for
which is essential to facilitate a RAL.17
The Internal Revenue Code also sets related tax preparer penalties for understating
tax liabilities (§6694); negotiating a client’s refund check (§6695); failing to sign a
return, provide a copy to the client, retain a copy of the return, or furnish a
preparer’s identification number (§6695); unauthorized disclosure or use of tax return
information (§6713 and §7216); and preparing a false or fraudulent return (§7206(2)).
The IRS permits RALs: (1) to honor the taxpayer’s choice; (2) to provide a clean, regulated
alternative to back-alley discounting of tax refunds (a practice, widespread before the advent
of RALs, in which undisclosed interest rates could exceed 3,000% APR with no consumer
protections); (3) to enhance customer service; and (4) to reach the congressionally-mandated
“Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and
Appraisers before the Internal Revenue Service,” 31 C.F.R., Subtitle A, Part 10, rev’d June 20, 2005.
See IRS Publication 1345, supra, note 12.
goal of 80% of all tax returns being e-filed by 2007—obtaining a faster refund is a compelling
incentive for taxpayers to e-file, and RALs deliver funds even faster.18
H&R Block employees and franchisees, who receive no added compensation for offering
RALs, are trained to present all options objectively to clients. Free IRS direct deposits of
refunds are presented before any fee-added bank products are discussed. And clients have
the option of rescinding the RAL transaction up to 48 hours after they sign the RAL
application. As a result consumers are able to change their mind after leaving an H&R Block
To assist consumers in making an informed choice based on objective information, we employ
a five step disclosure process for RALs developed with the assistance of the former head of
the Federal Trade Commission’s Bureau of Consumer Protection.
1. The Client Service Agreement, which is presented to clients upon their arrival at the
tax office. This two-page document explains what the client can expect as he or she
moves through the tax preparation process, including the filing and settlement
options available at H&R Block.
2. The Filing Options Screen in TPS, which displays the settlement options—both IRS
direct (for no fee) and banking (for an added fee)—that are available to our clients.
This screen also displays the tax preparation fees and bank fees, as well as the APR
(annual percentage rate) for clients who select an Instant or Classic RAL.
3. The Facts About RALs, which explains that a RAL is a loan, the additional charges
associated with a RAL, as well as the client’s other refund options. H&R Block tax
professionals are trained to review this brochure with clients at the tax desk before
the client applies for a RAL.
4. The Loan Application, on which the word “LOAN” is printed in capital letters
measuring 2 x 7.5 inches. The word “Loan” and the acronym “RAL” appear over 100
times in the loan application. The Loan Agreement and Disclosure Statement
provides Truth in Lending Act (TILA) information and explains the refund options
available to clients.
5. The Block Advantage statement, which summarizes the refund delivery option the
client selected, the anticipated time the client will have to wait for his or her refund,
as well as the cost associated with that choice. For clients who choose a RAL, advice
is included that other sources of credit may be less costly and should be explored. Tax
planning advice is also given regarding reducing withholdings so clients can receive
more money in each of their paychecks on a year-round basis rather than waiting to
receive a larger refund. The Block Advantage statement is software generated and is
provided to each client with his or her copies of tax return documents.
An added benefit to the IRS is enhanced fraud fighting by RAL banks and facilitators. Among the metrics in evaluating the Debt
Indicator Pilot was the cooperation of lenders and tax practitioners in fraud screening and reporting potential fraud to the IRS, efforts
which have continued. See “IRS Offering Tax Refund Offset Information In Exchange for Fraud Screening, Reporting,” BNA Daily
Tax Report, Dec. 2, 1999, pp. G2, and L1. Today, the Debt Indicator is provided to all e-filers as a benefit of e-filing. It can be shared,
at the request of taxpayers, with refund lenders. The debt information reduces loan losses and permits lower loan prices. Lenders,
transmitters, EROs, and return preparers have continued to strengthen fraud screens, software, compliance programs, and cooperation
with IRS criminal investigators.
Each of these layered disclosures, along with our tax professional training, is designed to
ensure that our clients make an informed choice.
Comments to Specific Questions
QUESTION 1: Should the final rule exclude loans made by regulated banks, credit unions
and savings associations and their subsidiaries already subject to Federal supervision and
regulation, either generally or in limited circumstances?
RESPONSE: Yes. A general exemption is desirable. As suggested above, the national bank
regulatory system, developed over 145 years, is well equipped to deal with consumer lending
issues encompassing RALs made by national banks and RALs are also extensively regulated
by the Internal Revenue Service. Agencies like the Office of the Comptroller of the Currency
(“OCC”) are capable of implementing and enforcing elevated consumer protections for
members of the military and their dependents, and OCC is likely to have more experience
and leverage than would the Department. Its powers include regular supervisory
examinations, cease and desist orders and fines for misconduct. See, e.g., 12 USC 1818,
1820(d). OCC also has experience acting in responding to complaints or concerns by state or
other Federal agencies. Because H&R Block serves as the express agent of the lender of
RALs in its offices with respect to RALs, any of H&R Block’s actions with respect to RALs
are done on behalf of the bank and are subject to the supervision of the OCC.
QUESTION 2: Do the duration and monetary limits in the definition of payday loans create
any unintended consequences for other credit products?
RESPONSE: Although this was not an intended consequence, some have argued that the
proposed definition of payday loan appears to encompass RALs that below $2,000, because
RALs are usually paid by the lender debiting a borrower’s deposit account into which the IRS
has electronically transferred the consumer’s tax refund. If RALs are included in the final
Rule, they should be treated entirely separately from payday loans, which have different
QUESTION 3: Does the definition of vehicle title loans cause any unintended consequences
for other credit products.
QUESTION 4: What regulatory approaches would encourage creditors to offer affordable,
small-dollar, short-term loans to Service members and their dependents? For example,
should transactions that would otherwise be treated as payday loans be exempt from
coverage under these rules if the MAPR is less than 24% MAPR or some other rate specified
in the rules? Would a similar rule be appropriate for RALs?
RESPONSE: A combination of competition, consumer education, and transparency should
encourage creditors to make loans at the lowest cost. Encouraging competitive market forces
should help achieve low prices and innovative products. Transparency should identify
products and practices that do not meet appropriate standards, which can then trigger
regulatory action as well as responsible public criticism. If the Department determines that
the Proposed Rule should apply to RALs, and that there is not an exemption for RALs made
by depository institutions, there should be an exemption for RALs if the MAPR is 36% or
less, provided that the refund account fee is properly excluded from the MAPR. The only
element of “predatory lending” that the Department believes exists with RALs is that the
interest and charges may be high. Thus, if the lender voluntarily limits the MAPR to 36% or
less, with the refund account fee properly excluded, the concern is addressed.
QUESTION 5: Should other fees in addition to those imposed for unanticipated late
payments, default, delinquency or other contingent post-loan events be expressly excluded in
determining the MAPR?
RESPONSE: Regulation Z (12 CFR 226) should serve as a model for calculating what fees
should be included in the MAPR, drawing on a well developed area of law. We support the
proposed exclusion of tax preparation fees, which are independent of any bank product fees,
charged in the same amount whether or not the tax client obtains a RAL, and are not a cost
As discussed above, we also recommend exclusion of the refund account fee, which is imposed
on a cash-equivalent basis for both RALs and non-credit bank products, such as a RAC
(sometimes called a electronic refund transfer), in which the IRS directly deposits a tax
refund electronically into a temporary bank account from which the proceeds are disbursed
to the taxpayer after the deposit account fee and tax preparation fees are deducted. Unlike
the RAL, no credit is advanced in the case of a RAC, but the same $29.95 refund account fee
is charged. Because the fee is independent of a loan and not a cost of credit, it should be
explicitly excluded from loan fees. Other fees charged independently of a loan, such as a fee
for the electronic filing of a tax return, should similarly be excluded if it is not charged only
QUESTIONS 6 AND 7: The Department would like feedback on the creditor’s involvement
in tax filing aspects of a RAL and comment on the safe harbor proposal in which a written
declaration of whether a borrower is a service member will be sufficient.
RESPONSE: The creditor is not involved in the borrower’s tax preparation or e-filing. The
tax return preparer may facilitate a RAL or, as in the case of H&R Block, act as agent for the
creditor in connection with accepting and transmitting the loan application and other related
documentation, but the tax preparer who is also an authorized IRS e-file provider may not
serve as the lender under IRS rules.19 For example, in connection with transmitting the RAL
application, and at the express consent of the taxpayer, the tax return preparer electronically
shares the borrower’s tax return information with the lender to enable the lender to
determine whether to make the loan and into which account to deposit funds.
We believe it will be challenging if not impossible for creditors to determine whether the
borrower is covered by the proposed rule based solely on tax return information such as
address or occupation. This is especially so in the case of dependents. Additionally, as noted
above, we suggest that consideration be given to conforming the definition of dependents to
that used in the tax code.
IRS Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, Publication 1345 (Rev.11-04), p. 44, at
www.irs.gov/pub/irs-pdf/p1345.pdf (imposing restrictions).
Given the serious penalties of the Act, the safe harbor provisions are helpful, especially if the
creditor can rely conclusively on the borrower’s written declaration. Since the lender is not
present at the site of tax return preparation, it would require the tax return preparer to
obtain and transmit the borrower’s declaration. Depending on whether the creditor wanted
to have an agency relationship with the return preparer and be legally bound by certain
actions, the creditor could decide whether to authorize the return preparer to report on the
declaration or to make a preliminary judgment whether a borrower was covered by the
regulations. The Department database registry would also be helpful especially if its use
provided further absolute safe harbor from otherwise uncertain determinations. However, the
database registry may need to be thoroughly tested and proven out before it’s used on a wide-scale basis.
Additionally, it may pose military families to privacy and security risks, if a database is made publicly
available with sensitive information about service members in active duty.
QUESTION 8: Does the Proposed Rule on providing disclosures orally adequately address
the compliance difficulties or is another approach more appropriate?
RESPONSE: No. Although we have no objection to communicating the information, written
disclosures ensure consistent delivery and can be monitored to ensure compliance. There are
significant compliance difficulties with oral disclosures.
If oral disclosures are required, we support permitting compliance with the oral disclosure
requirement in credit transactions entered into by mail or on the internet by providing
covered borrowers with a toll-free telephone number on or with the written disclosures, and
by giving oral disclosures telephonically when the covered borrower contacts the creditor for
QUESTION 9: Will disclosure of both an APR under Regulation Z and an MAPR under the
Proposed Rule confuse consumers? Are there alternative approaches to disclosing both an
APR and an MAPR?
RESPONSE: Yes. Disclosure of both an APR and a MAPR are likely to cause confusion. We
do not believe it is necessary to disclose the MAPR in order for the rate cap to be effective.
Consumers will be frustrated trying to understand the differences between multiple APRs.
The problem will be even worse in some states such as Illinois which already requires a
separate form of APR. As a result, a consumer in Illinois would be given three separate and
different APR written disclosures. This is more likely to confound than to protect consumers.
H&R Block is a strong advocate for best in class disclosures and practices, but multiple,
conflicting disclosures will undermine consumer protection and financial education. We do
not believe the MAPR must be disclosed in order for a rate cap to be effective.
QUESTION 15: What exemptions should the Department adopt to the limit in § 232.8(a)(5)
on a creditor’s use of checks or other methods of access to a consumer’s deposit account?
RESPONSE: Exemptions for electronic funds transfers to repay credit and for direct
deposits of salary required as a condition of credit should also permit a creditor to require
direct deposit of the consumer’s tax refund, as well as the consumer’s salary. RALs are less
costly because of the process by which the tax refund is direct deposited electronically into a
deposit account from which deductions and disbursement are made. We believe that a
creditor may require direct deposit of the consumer’s salary or tax refund as condition of
eligibility for consumer credit.
QUESTION 16: Should the Proposed Rule define the types of prepayment penalty fees that
are prohibited by § 232.8(a)(7)?
QUESTION 17: What issues are raised by the provisions of § 232.9 regarding the penalties
and remedies for violation of the Act?
QUESTION 18: Can creditors comply with the Proposed Rule by October 1, 2007, if the
Department issues final regulations by September 1, 2007?
RESPONSE: No. Compliance would be very difficult if not impossible for both lenders and
for tax preparation firms that offer RALs. Preparation for the filing season begins well in
advance of January. Forms must be printed and distributed in our case to over 12,500 offices,
training materials must be updated, printed and distributed, computer software must be
programmed and tested, staff must be hired and trained on a large number of technical tax
and financial issues, and changes from late enacted tax laws must be incorporated, etc. All
this is on a tight schedule. To avoid errors and to ensure adequate time to comply, more than
3 – 3½ months would be needed.
Thank you for the opportunity to comment and support the Department’s efforts to
implement regulations that are fair and effective. Please let us know if we can provide any
Very Truly Yours,
/s/ Robert Weinberger